Broader Discomfort Within the Fed?All Eyes And Ears Are Trained On Chair Powell
Tuesday's trading exhibited a "risk-off" sentiment, as evidenced by the decline in Treasury yields to one-month lows and gold's ascent for a fifth consecutive day, reaching an all-time high of $2,141
US stock indexes experienced widespread losses, akin to investors sailing in a sea of red, drifting further away from recent record highs as uncertainty surrounding the timing and quantum of potential interest rate cuts is starting to factor in. At the same time, uninviting developments affecting the "Magnificent Seven" stocks injected a sense of caution into the market sentiment.
Apple's grip on the Chinese consumer market is weakening. Independent research, as reported by mainstream media outlets, suggests that iPhone sales plummeted by nearly a quarter in China during the initial weeks of 2024. This news compounded the losses experienced on Monday following a $2 billion EU antitrust fine imposed on the company. Additionally, Tesla continued its decline amid concerns surrounding a shutdown at its Berlin Gigafactory, contributing to worries about shipment reductions and a price war in China.
The market's recent gains have heavily relied on a handful of mega-cap stocks. Consequently, negative news about these key players can trigger a broader pullback across the entire index spectrum, even more so if sales worries emanate from China, which makes up a hefty portion of these tech behemoth earnings from a geographical perspective.
Indeed, this decline in iPhone sales also serves as a stark reminder of the ongoing trade tensions between the United States and China. If Donald Trump were to return to the White House and fulfill his promise to impose significant tariffs on Chinese goods, these tensions could escalate even further, and US tech investors could pay the price.
With all ships springing a leak or two, including Bitcoin (BTC-USD), which experienced a 10% decline after briefly surpassing its previous record in November 2021, it has naturally sparked "bubble" debates, and not just about Bitcoin but whether the technology-driven gains fueling the recent stock rally have peaked. The latest downbeat news has seemingly reduced the "FOMO" (fear of missing out) pump that has kept "Johnny Come Lately" investors actively engaged in the market. So, with debates swirling about a potential mini-bubble at best or a massive one at worst, investors are in recoil mode.
Fed cuts or, more accurately, the expectation thereof later this year has been "sparking animal spirits," so jaws continued to drop overnight after Atlanta Fed President Bostic, on Monday, said he saw just one rate cut this year pencilled in for the third quarter.
Fed officials may become increasingly aware of the inflationary risks associated with another "everything rally." Raphael Bostic's Monday warning about "pent-up exuberance" was explicitly directed at businesses rather than asset prices. However, it hinted at a broader discomfort within the Fed. Of course, It remains to be seen whether Jerome Powell will echo Bostic's sentiments during his testimony on Capitol Hill this week.
Now, investors are sitting on the edge of their chairs, placing even greater emphasis on Fed Chair Jerome Powell's testimony to Congress on Wednesday. His remarks will be scrutinized for any shift in the current three-cut narrative. So, investors have moved into pre-event risk mitigation mode.
OIL MARKETS
Oil futures experienced a second consecutive session of decline on Tuesday, influenced by a pair of US macroeconomic indicators. The Institute of Supply Management (ISM) released data revealing a cooling trend in business activity across the US services sector in February, which accounts for approximately 70% of the gross domestic product (GDP). Notably, the Employment Index, a key metric, contracted for the second time in three months, hinting that the US labour market, a fundamental support for economic growth in recent years, may weaken under the constant pressure from high-interest rates.
MACRO VIEW
Given the circumstances, the moderate reading on the ISM services index might have been considered precisely what the doctor ordered, as it had the potential to alleviate concerns about the US economy running excessively hot and especially relevant in the context of the Federal Reserve's efforts to restore price stability.
But as the economic data conundrum rolls on, some hot, some cool, the subindexes send conflicting signals. Specifically, the business activity and new orders gauge picked up while the employment component slipped into contraction territory.
Frankly, the data seemed to get lost in the pre-high-risk event rebalancing shuffle, overshadowed by the reverberations from Fed Bostic's hawkish rhetoric.